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‘Japan has a great industrial complex but doesn’t have the resources to support it’: Van Eck’s Semple

As Japan struggles to mop up the damage from its earthquake and tsunami-driven nuclear disaster, market participants are considering its impact on the global economy, including energy demands and supply chain issues, as well as its impact on companies’ balance sheets and investment portfolios.

To be sure, the direct effects of the disaster include rebuilding the worst-hit parts of Japan that have left thousands homeless and containing the health risks of nuclear fallout while restoring power. Beyond those immediate effects in Japan, the disaster highlights a basic problem for the whole world: in the global economy, where raw materials come from one place and are manufactured in another, any one region where the supply chain breaks down creates problems for the whole.

“With globalization comes specialization, and specialization means that there are can be difficulties if one link of the chain is stretched or altered,” said David Semple, portfolio manager for the Van Eck Emerging Markets Fund (GBFAX), who has been closely following the tragic developments unfolding in Japan. “Put simply, Japan has built a great industrial complex, and they simply don’t have the resources to support it.”

Economic impacts to the U.S. will be both positive and negative, but the net impact of a weaker Japan and a weaker global economy will likely be a moderate downshift to previously strong global gross domestic product (GDP) growth for 2011, wrote PNC Bank chief economist Stuart Hoffman in an analyst note.

“It is likely that Japan will see a decline in GDP at least over the first two quarters of 2011, if not longer,” Hoffman said. “We expect Japan to emerge from this crisis with increasing evidence of economic stability in the second half of this year. There have already been repercussions for the U.S. economy, initially, and perversely, in the form of a positive as oil prices dipped on the expectation that Japan would consume less oil due to impairments to production and transportation systems.”

That downshift will not be enough to derail the ongoing U.S. economic expansion, Dye said, and opportunities may exist for U.S. manufacturers to gain some market share. “But there will also be production bottlenecks in the U.S. to contend with as Japan deals first with the human crisis, then repairs, rebuilds and resumes production,” he warned.

For example, equity researchers at Canaccord Genuity said Wednesday in a comment on biomedical devices that they are cautious about the Japanese disaster’s effect on the MedTech market, believing it could cause weakness in near-term results for orthopaedic companies such as Wright Medical and Alphatec.

And The New York Times reported Thursday that technology analysts’ greatest worry about digital device makers is the supply from Japan of NAND flash, the lightweight storage chips used in smartphones, tablet computers, digital cameras and a variety of other components. Toshiba, the world’s second-largest maker of the chips behind Samsung of South Korea, has closed some production lines.

In the Technology sector, manufacturers often “don’t have a great deal of diversity of supply in some specific high-value-added products,” Semple noted. Companies tend not to have high inventories because the product cycle is very short, and the technology chain has become quite specific for various commodities where there may be just a month or two’s inventory that can be relied upon.

“If you’re making smartphones in Taiwan, one of the things you need is something called BT resin, and the vast majority of BT resin in the world is made by Mitsubishi Chemicals,” Semple said. “Mitsubishi has significant production issues at the moment. That may be related to a power outage, in which case you can be more relaxed about it, but if there is actual physical damage at the plant, that’s a bigger problem.”

Specifically, the Van Eck Emerging Markets Fund has made some portfolio adjustments that are very industry specific, putting more money into liquefied natural gas through Gazprom, and more into thermal coal.

“We had been relatively downbeat on technology prospects, and this adds to that,” Semple said. “We had been relatively upbeat on thermal coal, and this adds to that. In a way, the situation in Japan magnifies some of the concerns or attributes that we had already put into place in the portfolio selection.”